Unless the private health-care sector works out a radical new deal to provide affordable, quality care, the system as a whole is in jeopardy.
The medical aid industry is under pressure after years of rampant medical inflation. The cost of employee health-care benefits has doubled in six years and now consumes almost 10% of the average company's payroll.
In January, most open schemes raised their contribution rates by more than 15%. (These are schemes open to whoever can pay the contributions, regardless of their age or health.) Employers can no longer afford these annual price hikes and are scaling back employee benefits aggressively. Old Mutual Healthcare has warned that if these trends continue, a member could be spending not 10%, as is the case now, but almost 30% of his or her salary on medical aid by 2009 - as much as on home-loan repayments.
Costs are driven mainly by over-servicing and profit-taking, advances in medical technology, the ageing of the population and imported inflation. Since most of SA's medical services and drugs are imported, the sharp fall in the rand has fuelled medical inflation. Medical inflation is likely to far exceed consumer price inflation for the foreseeable future.
Until two years ago, open schemes broke even on average, but since then they have been incurring an operating loss before investment income. They are having to use investment income to pay claims and to cover that loss, which is eroding their reserves.
The average solvency level of open schemes is on a clear downward trajectory, having fallen from 18,4% in 1998 to 14,3% in 1999 to 13,6% in 2000 - and this at a time when schemes are legally required to raise their solvency levels each year.
A clear indication that schemes are pinched is that last year 10 of them announced interim contribution increases, compared with only one or two in previous years. The industry was shocked by the unprecedented step taken earlier this year by Vulamed and Protector to institute interim increases from March 1, just months after the annual January increases.
Last year two big insurers, Fedsure and Sanlam, withdrew from the medical scheme market, and Phila and Publiserve were placed under liquidation after financial difficulties. Industry commentators expect more scheme failures.
Medical scheme membership has stagnated at about 7m and appears to be ageing. Each year 10%-20% of members switch to cheaper scheme options. The danger is that the young and healthy will opt out entirely. Since they cross-subsidise the old and sick in a scheme, their exodus leads to an upward cost spiral and a shrinking pool of members.
Were it not for the fact that the public health sector generally provides such poor care, members might already have deserted medical schemes in large numbers. In the absence of any real alternative, members are prepared to pay almost anything to get private health care, thus keeping the industry afloat.
The future of the entire private health sector is inextricably linked to the health of the medical schemes industry. With the latter in danger of pricing itself out of the market, it is in all players' best interests to devise new models of affordable, quality care.
It was with this precise intent that the sector took the unprecedented step a year ago of engaging independent facilitator Charles Nupen to head a consultative forum, called the Michaelangelo Group, which brought together the four main role-players - medical schemes and administrators, private hospitals, drug companies and medical practitioners.
A year on, the group has prepared a draft declaration which commits the players to tackling cost-drivers and reforming the system. There is consensus about the causes of the industry's woes and what needs to be done; the problem is in the execution. The solution requires each player to set aside vested interests, to cut costs and hence profits, in order to secure the long-term sustainability of the sector as a whole.
This is a tall order in a sector with 160 medical schemes and about 40 000 providers, especially one marked by mistrust between funders and providers and between schemes and the industry regulator. So far, such compromises have been rare.
(Netcare and Medscheme pulled out of the Michaelangelo Group earlier this year, claiming that Aslam Dasoo, then CEO of the industry body, the Board of Healthcare Funders, had bad-mouthed sectors of the industry in a public forum.)
"It's extremely disappointing that everyone knows what has to be done - that we can save costs only by all being accountable and putting aside our vested interests and designing products with the patient as the focus - but that is all talk," says African Health Synergies CEO Martyn Schickerling. "There is little actually happening and unless we convert that talk to action, the private health-care sector won't survive the next two or three years."
He says only three medical aid administrators - Medscheme, Discovery Health and Medihelp - fully support the principle that medical practitioners must play a role in controlling costs and have forged relationships with GP networks to do so.
Of the three, Schickerling says, only Medscheme has taken a longer-term view and has designed a performance-based reimbursement system that seeks to reward doctors not just for shaving a few percent off a scheme's medicine bill, but for changing the profligate way they tend to practise medicine as a whole.
A classic example of the failure of groups to set aside their interests for the greater good was provided by SA's biggest doctor network, GPNet, earlier this year in its reaction to the launch of Medscheme's list of essential drugs. The list is biased in favour of cheaper, generic drugs and is expected to trim 20% (R800m) off the annual drugs bill of participating schemes.
But GPNet, which has its own drugs list, slammed the initiative on the spurious grounds that locally made generics might be inferior to original, patented medicines. GPNet subsequently backed down, but the damage had been done.
"I don't believe people have committed themselves to ripping the base out of the current system," says MX Health CEO Neels Barendrecht. "They're sitting around the table each thinking about the last little bit of fat they can wring out of it and about what their competitors are doing, instead of pledging to do something to make a difference."
Old Mutual Healthcare actuary Adrian Baskir agrees, saying: "I don't believe the stakeholders are ready to talk to each other. There is a lot of mistrust. Also, the provider community, apart from GPs, is not yet experiencing the crisis. They are continuing to profit from private health care. For them it's business as usual."
Private hospitals and specialists - which together account for almost 50% of medical schemes' total claims costs - are coming under heavy fire for refusing to help. As listed companies, the three private hospital groups - Afrox Healthcare, Medi-Clinic and Netcare - continue to post excellent results, but questions are being asked about how much longer this can last.
Afrox MD Michael Flemming admits as much when he says: "We've had a bit of a holiday and been able to grow our business, but where to from here?
"We all understand the need to deliver cost-effective health care," he adds. "What we need is a burning platform and hopefully that's been created by the fall in the rand. The window of opportunity is closing. We probably have two years to all assume responsibility for the cost of health care, minimise costs and pass those savings on to the consumer. If we don't respond now, private health care will become a shrinking market."
Medscheme CEO Anton Roux expects that within the next 18 months, the main medical administrators will secure co-operation agreements with the hospital groups requiring the latter to share in some of the risk of caring for medical scheme patients.
There is a continuum of risk-sharing that requires hospitals to assume progressively more risk. It starts with fixed fees per procedure. Then come per diem rates (a fixed daily hospital rate) and finally fees that are fixed according to diagnostic-related groups (DRGs). Under the current fee-for-service model, hospitals take no risk because the medical aid pays the bill. Under future reimbursement models, hospitals will have incentives to keep costs down because if the cost of a standard procedure, operation, or day in hospital exceeds the norm, they will be liable for the downside.
DRGs involve grouping procedures (diagnoses) into broad resource categories. A fixed fee is paid per category, thus giving the hospital an incentive to find the most efficient way of providing the care. If surgical complications arise, the diagnosis changes and a higher fixed fee is levied.
Netcare executive director Norman Weltman has spearheaded the creation of the Private Healthcare Association, a group of large funders and private hospital groups that negotiate directly on hospital tariffs.
"This is the most crucial aspect," he says. "If providers and funders can engage constructively on tariffs, the rest falls into place."
He says the biggest delay in getting providers and funders to co-operate has been industry politics. Joint initiatives have been rare as either funders or providers have always wanted to take the lead.
Weltman feels the Private Healthcare Association is a truly consultative process where the two sides are working together. The catalyst, he says, was the collapse of the rand.
He says up to 90% of the industry is still locked in the fee-for-service model. The goal of the industry has to be to turn this statistic on its head so that only 10%-20% operate under fee-for-service arrangements and the remainder use a mix of fixed fees, per diem rates and DRGs.
He estimates that it will take at least two years for the industry to make the leap to DRGs but hopes Netcare will begin pilot projects with a few big funders using DRGs within the next 18 months.
Commentators are concerned that the outcome of closer co-operation between administrators and hospital groups could be that the two entities will integrate vertically into for-profit, provider-driven companies, similar to the Health Maintenance Organisations (HMOs) in the US.
The Competition Commission has heard mutterings that such models are under discussion and is keeping a close eye on developments to ensure that the consumer will not be the loser. The incentive of a private, listed hospital company to maximise profit from treating patients is obviously at odds with that of an administrator, which should seek to keep health-care costs as low as possible for the schemes it administers.
Roux scotches the idea that vertical integration is on the cards between Netcare and Medscheme, saying it would be more logical for hospital groups and administrators to enter into cross-shareholdings that allowed each to have representation on the other's board.
"This should help to speed up the process of co-operation between providers and funders and could start happening within 12 months," he says.
Another suggested solution has been to expand the medical schemes market by designing more affordable products for the 6,9m people, mostly blue-collar workers, who have jobs but are uninsured. All key providers are in discussions with administrators about developing low-cost products for this market. Typical of these products is that they require providers to share the financial risk of catering for a given patient pool. The new trend is to reward providers for practising judicious medicine.
CareCross's Reinder Nauta warns, though, that the emerging market harbours huge, hidden problems, including Aids, and its members are prone to ditching cover the moment they perceive they are not getting value for money.
It isn't possible to capture significant volumes of new, emerging-market members at current product prices, says Ingwe HPO MD Peter Botha. Usually an optimistic person, he finds it hard to remain upbeat. "I can't see any salvation. It's a hostile environment, a provider-driven and over-regulated market, and it doesn't look good for schemes."
The average salary in this market is R3 000/member/month and low-cost products cost about R350/member/month, roughly 10% of salary. This is affordable only if the employer pays half.
Botha says the price needs to fall to R185/member/month to unlock volumes, but argues that this isn't possible unless the statutory minimum benefits package is relaxed, schemes are allowed more flexibility in managing risk, and a delivery vehicle less costly than private hospitals is found.
Praxis Capital director Jonathan Broomberg says that in the absence of public hospital reform, the prescribed minimum benefits package has inflated costs enormously and retarded the development of low-cost packages since schemes have had to pay for this suite of services to be delivered in a private hospital setting.
The result is zero net growth in membership because people cannot afford the products. Proposed amendments to the Medical Schemes Act to further expand the minimum benefits package will make things worse.
Broomberg claims that in the past year, low-cost schemes' spending on private hospital and specialist care has increased from R180 to R250/member/month on average, raising the average cost of these plans to about R350/member/month from about R250 a year ago.
Most big administrators are exploring low-cost options using private medical centres located in public hospital complexes, such as Rhôn-Klinikum's R45m joint venture with the University of Cape Town at Groote Schuur Hospital, Tygerberg Hospital's private ward, and Netcare's 200-bed private facility in Bloemfontein's Universitas and Pelonomi public hospitals.
In May, Johannesburg Hospital opened a 32-bed unit that will cater for members of low-cost medical schemes. Similar facilities are planned in Helen Joseph, Sebokeng, and Pretoria West hospitals.
The Taylor committee of inquiry into a social security system for SA envisages that State hospitals will in future play a much larger role in catering for this market. This is great news for medical schemes but most are highly sceptical about the public hospital sector's ability to reform on a big-enough scale.
Though exciting things are happening on a micro level, the overall solution is for all the role-players to pledge to abide by a low-cost delivery model. Such a pledge should include the following components:
- A drive towards evidence-based medicine. This means that schemes will pay for new drugs and medical equipment only if independent pharmaco-economic studies prove that they improve health outcomes and are cost-effective. Drug manufacturers and medical suppliers must agree not to market new technologies to hospitals and dispensing doctors unless such cost-benefit studies have been done. Government could introduce legislation to this effect.
- Consumers must understand that the consequences of ripping off the medical aid system are that the days of 100% reimbursement, unlimited benefits and unrestricted choice of provider are over. From now on, affordable cover will mean complying with managed-care restrictions.
- Likewise, trustees, managed-care companies and employers need to start making unpopular decisions that circumscribe patient choice but are essential for the survival of the system.
- Providers, and in particular specialists and hospitals, must start sharing more risk with funders. New reimbursement models must move towards rewarding providers not on the basis of how much care they provide but on the improved health of their patients.
- Low-cost health plans for the employed but uninsured must be designed that require all players to share risk.
- Government must speed up the introduction of the Medicines & Related Substances Amendment Act's provisions relating to the mandatory substitution of generics, restrictions on dispensing by doctors, and the professional fee for pharmacists.
- The Council for Medical Schemes needs to face the fact that its reforms have not made medical aid more affordable. It should sit down with schemes to assess the long-term sustainability of the industry and to help chart a new way forward.